Retirement Patchwork

Depending on your age, this may be a bit of a stretch, but go with me on this for a minute: picture retirement. 

How does retirement look to you?  Is it an orderly, easily-understood process that you follow when the time comes?

Oh man, if only it was so! 

It’s often bemoaned that the government likes to make things difficult, and retirement is certainly no exception to that. We’d like to think the U.S. Congress would create a straightforward system for determining when you can make contributions to retirement accounts, and to which accounts, and how much.

But of course, we’re afforded no such luck.

Nobody knows why the patchwork of ages, accounts and contribution amounts has to be so complicated, but this is the world we have to live in, folks.

This year, the contribution limit for both traditional and Roth IRAs is $6,000. BUT you can only make that contribution if your taxable income is greater than that amount.  Otherwise, you would just be able to contribute the lesser taxable income amount.

Here is an article with some good information on age restrictions for IRA contributions.   

The article discusses how people age 50 and older are entitled to contribute an additional $1,000.  BUT (and here’s where it starts to get complicated) people over age 70 1/2 currently CANNOT continue to contribute to a traditional IRA.  But people of any age CAN contribute to a Roth IRA so long as the household earns enough money.

Are we having fun yet?  Well sit tight, it gets better. 

You probably already know that your Roth IRA contribution will be part of your taxable income, while the traditional IRA contribution is not taxed until it comes out, and then it’s taxed as ordinary income, not capital gains.  But when you take the money out of a Roth IRA, the distribution is not taxable. Thus, with each account, the government avoids double taxation.  

And, heck, just to complicate things further: people over age 70 1/2 are required to start taking distributions from a traditional IRA account, with the percentage of the total account growing each year, based on the government’s life expectancy tables.  Roth IRA money doesn’t have to be distributed until or unless the account is inherited.

When Roth or traditional IRAs are inherited, some of the money must be distributed to each of the heirs under relatively complex rules that are, once again, based on the life expectancy of the new owner. But whatever money is still in the account is able to continue to compound tax-free.

If your company has a Simplified Employee Pension (SEP) retirement plan, then the limit this year is $13,000 for employees under age 50, and $15,000 for employees over 50.  But if the employee is participating in another employer plan (say, a 401(k) plan) during the year, the cumulative contribution amount for both plans cannot exceed $19,000.  And there’s no upper age limit to contributing to a SEP account, so long as the employee is still working and earning an income.  But, unlike the other accounts here, people under age 21 cannot contribute to a SEP account.

Whew! My brain feels a little fuzzy.  Who needs a recess break?  

When it comes to retirement, it’s very easy to feel lost or overwhelmed by all the rules, regulations, and options out there. Thankfully, you don’t have to go it alone.  A Certified Financial Planner can help you manage the process and decide on the options that are best for YOU.